Paying tax under new pension rules

Hundreds of thousands of savers could be heading for a tax shock at retirement because they fail to understand the new pension freedom rules being introduced by the Government.

Many people with defined contribution pensions are labouring under the illusion that they will be able to access their retirement pots tax-free from next April 2015, the truth is many will be paying tax under new pension rules.

People will be given unrestricted access to their pension pots provided they’re above the age of 55, but most retirees still do not realise they will still have to pay marginal income tax on withdrawals.

But the basic premise is that people with money purchase pensions will be able to make withdrawals from pots as and when they like once they turn 55.

They will still be able to take 25 per cent of their pot as a tax-free lump sum.

Previously, withdrawing cash above the 25 per cent lump sum from a pension pot outside of an annuity or income drawdown product would have incurred a 55 per cent tax charge on the amount taken – but this has been scrapped.

Instead, savers will only have to pay income tax on their withdrawal, and how much tax they pay will depend on their whole income during the financial year.

So based on 2014/15 tax rates, incomes of up to £10,000 will be tax-free because of the personal allowance, while earnings between £10,000 and £41,865 will be taxed at 20 per cent.

Earnings between £41,865 and £150,000 will be taxed at 40 per cent, and income above £150,000 will be taxed at 45 per cent.

Those who plan on withdrawing their full pension pots from next year should bear in mind that they risk paying higher levels of tax on it than they would if they spread their withdrawals out over several years, particularly if they have other sources of taxable income such as a work salary or rental income.

Credencis provide bespoke pension advice to help you make the right choice in retirement.

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